In Short
- Consider the Impact – Termination is a serious step. Assess the business, legal, and operational consequences before taking action.
- Follow the Code – Issue a written breach notice, allow reasonable time to fix the issue (up to 30 days), and ensure compliance with legal requirements.
- Explore Alternatives – A warning letter may resolve minor breaches without escalating to formal termination.
Tips for Businesses
Before terminating a franchisee, weigh the business and legal risks. Ensure breach notices meet the Franchising Code of Conduct requirements, allowing a fair chance to fix issues. A warning letter can help address problems without immediate legal action. If unsure, seek legal advice to avoid missteps that could affect your franchise system.
If a franchisee breaches your franchise agreement, there are some legal and practical considerations you should make before terminating. The Franchising Code of Conduct (the Code), sets out a process you must follow if you wish to terminate a franchisee due to their breach of the franchise agreement. This includes issuing a breach notice and providing them enough time to respond and rectify the issue. If you do not, you risk breaching the agreement yourself. This article explores some considerations you should make before you terminate your franchise agreement for breach.
Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.
This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.
Consider the Consequences of Termination
It can be frustrating when a franchisee breaches your agreement. However, termination might not be the most practical solution. Therefore, when considering terminating a franchise agreement, it is crucial to consider the practical steps you will need to take.
As a franchisor, you should consider:
- what will happen to the business premises following termination (especially where the franchisee is on the lease and there is no step in deed);
- where relevant, if you have the means to continue the operation of the franchised business following termination;
- whether the territory is booming and therefore, you should keep it in the franchise system;
- how you will prevent the franchisee from continuing to access your franchise business’ intellectual property;
- what other steps will you need to take to prevent the franchisee from operating the franchise business; and
- how damaging the breach is to the franchise system as a whole.
Ultimately, it would help if you kept these practical considerations at the forefront of your mind when deciding to terminate the agreement. You must also consider the following legal requirements when terminating a franchise agreement.
Issue a Breach Notice
Additionally, when your franchisee breaches the agreement, you may be able to issue them a breach notice. According to the Code, the breach notice must:
- be in writing;
- specifically outline the breach;
- notify the franchisee that you propose to terminate the franchise agreement because of the breach;
- identify the term of the franchise agreement that the franchisee has breached and the franchisee’s conduct that violates the term;
- advise the franchisee of what they must do to remedy the breach; and
- provide the franchisee with a reasonable amount of time to remedy the breach.
However, under the Code, ‘reasonable time’ does not have to be more than 30 days.
If the franchisee does not remedy the breach, you may terminate the agreement as set out below.
Continue reading this article below the formIssue a Termination Notice
If you complete the steps outlined above and your franchisee does not rectify the breach, you may be able to provide your franchisee with a termination notice. Whether you can terminate the franchise agreement based on the breach notice depends on the circumstances of your case.
Furthermore, if you fail to include all the Code’s information in your breach notice, the breach notice could have no effect. Consequently, the termination might also be ineffective if you attempt to terminate the agreement by relying on the ineffective breach notice. For this reason, it is essential to seek legal advice before you issue a termination notice.
Termination in Special Circumstances
The Code allows you to terminate a franchise agreement in specific circumstances by giving your franchisee seven days’ written notice. The particular circumstances include instances where your franchisee:
- loses a licence that they require to operate the franchise, such as a building licence or liquor licence;
- goes bankrupt or insolvent;
- is deregistered by the Australian Securities and Investments Commission (ASIC);
- voluntarily abandons the franchise;
- is convicted of a serious offence with a minimum sentence of five years or commits an ‘offence’ under the Corporations Act;
- risks the health or safety of the public because of how they run the franchise; or
- commits fraud concerning the franchise, such as falsifying company records or intentionally misstating income.
It is important to note that the Franchising Code of Conduct is set to undergo changes effective 1 April 2025. These amendments will expand the circumstances under which a franchisor can terminate a franchise agreement with seven days’ notice. The new grounds for termination will include:
- serious contraventions of the Fair Work Act by a franchisee; and
- certain contraventions of migration laws.
Consider a Softer Approach with a Warning Letter
Before resorting to formal breach notices or termination, you may want to consider taking a softer approach by issuing a warning letter to your franchisee. While a warning letter does not have the same legal weight as a breach notice and cannot be used as grounds for termination under the Code, it can effectively address issues without immediately escalating the situation.
A warning letter allows you to:
- formally document your concerns;
- clearly communicate the specific issues that need to be addressed;
- maintain a more amicable relationship with your franchisee;
- provide an opportunity for the franchisee to remedy the issues without the pressure of an impending termination; and
- demonstrate your willingness to work collaboratively towards a resolution.
This approach can be particularly useful when the breach is not severe, or you believe the franchisee may be unaware of their non-compliance. By giving the franchisee a chance to correct their behaviour without the immediate threat of termination, you may be able to preserve the franchise relationship and avoid the practical and financial challenges that come with termination. However, if the franchisee fails to respond positively to the warning letter, you can proceed with the more formal steps outlined in the Code, such as issuing a breach notice.
Key Takeaways
Before you terminate the franchise agreement, you should consider the practicalities of terminating your franchise agreement. In addition, you must:
- give franchisees reasonable time to rectify the breach after giving them written notice of the breach per the Code;
- issue a termination notice if you issue the breach notice correctly, but the franchisee fails to rectify the breach in the specified time; and
- consider if circumstances allow you to terminate the franchise agreement after giving seven days’ notice.
If you have questions about dealing with a franchisee’s breach of the franchise agreement, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
You must give your franchisee a reasonable period to rectify the breach. What is reasonable can depend on the type of breach and whether you have previously issued a notice of the kind of breach. However, ‘reasonable time’ does not have to be more than 30 days.
Under the Franchising Code of Conduct, ‘special circumstances’ termination allows you to terminate a franchise agreement after giving seven days’ notice. The special circumstances range from where a franchisee loses a licence that they need to operate the franchise to being deregistered by the Australian Securities and Investments Commission (ASIC).
We appreciate your feedback – your submission has been successfully received.
